Why are risk models and simulations used and what benefit do they provide to the management of project risks?
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INFO 580
Project Risk Analysis &
Management
Module 5a: Quantitative Risk Analysis – More
Tools and Techniques
Quantitative Tools & Techniques
• EMV (Expected Monetary Value)
• Three Point Estimate
• PERT Estimate
• Force Field Analysis
• Fault Tree Analysis
• Scenario Analysis
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Quantitative Tools & Techniques
– EMV
• EMV (Expected Monetary Value)
▪ EMV = Probability x Impact
▪ Can be positive (+$) or negative (-$)
Examples:
• Positive (Opportunity/ Benefit)
▪ 40% likelihood of a $50,000 profit (from the new marketing campaign)
▪ EMV = 0.4 x $50,000= +$20,000
• Negative (Threat/ Loss)
▪ 70% likelihood of a $25,000 loss (from hurricane damage)
▪ EMV = 0.7 x -$25,000= -$17,500
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INFO 580
Project Risk Analysis &
Management
Module 5b: Quantitative Risk Analysis – Three
Point Estimates
Quantitative Tools & Techniques
– 3 Point Estimate
• 3 Point Estimate
▪ Optimist (O); Most Likely (ML); Pessimistic (P)
▪ 3 Pt. Est.= (O + ML + P)/ 3
Example:
• How long with Task A take to complete?
• O= 3 days; ML= 4 days; P= 8 days
• 3 Pt. Est.= (3 + 4 + 8)/ 3= 15/ 3= 5 days
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Quantitative Tools & Techniques PERT Estimate
• PERT (Program Evaluation and Review Technique) Estimate
▪ A specific type of 3 Point Estimate
▪ Optimist (O); Most Likely (ML); Pessimistic (P)
▪ PERT Est.= (O + (4xML) + P)/ 6
Example:
• How long will Task A take to complete?
• O= 3 days; ML= 4 days; P= 8 days
• PERT Est.= (3 + (4×4) + 8)/ 6= (3+16+8)/ 6= 27/ 6= 4.5 days
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INFO 580
Project Risk Analysis &
Management
Module 5c: Quantitative Risk Analysis – Force
Field Analysis
Quantitative Tools & Techniques Force Field Analysis
Details:
▪ Driving Forces (Positive)
▪ Restraining Forces (Negative)
▪ Denotes the strength of each force
▪ Used to determine the effect project uncertainties
(risks) will have on project objectives
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Force Field Analysis
Force Field Analysis
Implementation of Enterprise Resource Planning Application
(Force Strength)
Driving Force
(Positive)
+5
+4
+3
+2
+1
0
-1
-2
-3
-4
-5
Restraining Force
(Negative)
C-Level support
General inertia, esp. at middle
management
Shareholder support, w ith the
projected revennue
Cost of ERP is high; concern w ith
project budget
Greater Board engagement, esp.
more timely report and decision
making
Skepticism w ith past
management
initiatives
Similar systems already in place,
can create synergy
Existing w orkload pressures;
integration of systems is
challenging
Enable an integrated evaluation
of critical company resources
More fear of change as middle /
low er management may lose
control over their resources
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INFO 580
Project Risk Analysis &
Management
Module 5d: Quantitative Risk Analysis
Quantitative Tools & Techniques Fault Tree Analysis
• Fault Tree Analysis (FTA):
▪ Deductive failure analysis of potential project
failures (risks)
▪ The threat risk (failure) is detailed at the top of the
diagram
▪ Uses Boolean logic [algebra where values may
either be true or false]
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Space Shuttle
Challenger Explosion:
O-Ring Analysis
Fault Tree Analysis
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Quantitative Tools & Techniques –
Scenario Analysis
• Defined:
▪ Evaluate risks give a plan of action, based on different scenarios/ conditions
that could take place as the plan progresses.
▪ Use dollars or days to measure the impact of each scenario
▪ Not dependent on past results, so it may reveal black swans…
o Just because we haven’t see an event occur in the past, doesn’t mean it won’t
occur in the future.
▪ A way to think about the future in a structured manner
▪ Provide a reasonable number of possible scenarios without being excessive
(consider the law of diminishing returns)
▪ Both short-term and long-term time frames for scenarios can be evaluated.
Salleh, S. (6/28/13) Risk and Uncertainty Blog- Estimating Risk: the importance of Scenario Analysis. Lumina Decision Sys
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INFO 580
Project Risk Analysis &
Management
Module 5e: Quantitative Risk Analysis Decision Tree Example
Quantitative Methods – Decision
Tree Analysis Review
Decision Tree Analysis
• Used for selection of alternatives
• Paths are shown using branches in
the decision tree
• The EMV (expected monetary value)
of each branch is used to determine Decision
the optimal path (best selection)
Point
while considering uncertainties
▪ (This will be discussed in detail next
week.)
• May be used for threats and/ or
opportunities
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Task
Point
Task
Point
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Result
Point
Result
Point
Result
Point
Result
Point
Quantitative Tools & Techniques –
EMV Review
• EMV (Expected Monetary Value)
▪ EMV = Probability x Impact
▪ Can be positive (+$) or negative (-$)
Examples:
• Positive (Opportunity/ Benefit)
▪ 40% likelihood of a $50,000 profit (from the new marketing campaign)
▪ EMV = 0.4 x $50,000= +$20,000
• Negative (Threat/ Loss)
▪ 70% likelihood of a $25,000 loss (from hurricane damage)
▪ EMV = 0.7 x -$25,000= -$17,500
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Quantitative Tools & TechniquesDecision Tree
Example Decision Tree Analysis:
• Decision Point= Make or Buy Decision
▪ Task Point= Make Product
▪ Task Point= Buy Product
▪ For Make Product:
o Profit: 80% of $57,000
o Loss: 20% of $25,000
Make
Product
Make or Buy
Decision
▪ For Buy Product:
Profit: 80%
of $57,000
Loss: 20%
of $25,000
Profit: 95%
of $40,000
Buy Product
Loss: 5% of
$35,000
o Profit: 95% of $40,000
o Loss: 5% of $35,000
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Quantitative Tools & TechniquesDecision Tree
Example Decision Tree Analysis:
• EMV for Make Product:
▪ Profit: 0.8 x $57,000= $45,600
▪ Loss: 0.2 x -$25,000= -$5,000
▪ Total EMV(Make)= $ 40,600
Largest positive
value
• EMV for Buy Product:
▪ Profit: 0.95 x $40,000= $38,000
▪ Loss: 0.5 x -$35,000= -$17,500
▪ Total EMV(Buy)= $20,500
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INFO 580
Project Risk Analysis &
Management
Module 5f: Quantitative Risk Analysis Summary
Quantitative Tools & Techniques
While the qualitative analysis will provide us an assessment of the impact and
prioritization of individual risks:
• The joint effect of these risks needs to be assessed
• The monetary or schedule impact(s) (dollars or days) need to be assessed.
Tools and Techniques of Quantitative Risk Analysis:
• Expert Judgment
• Data Gathering
• Interpersonal & Team Skills
• Representations of Uncertainty
• Data Analysis
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Quantitative Analysis
Tools/techniques include:
• EMV (Expected Monetary Value)
▪ EMV = Probability x Impact
▪ Can be positive or negative
• 3 Point Estimates
• Simulation: Monte Carlo Analysis & Latin Hypercube
• Force Field Analysis
• Fault Tree Analysis
• Scenario Analysis
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